by J.D. Foster
Social Security’s finances are deteriorating rapidly. Even without intervening recessions, in a few years Social Security will be unable to pay the benefits promised. What to do? One obvious suggestion is to raise the payroll tax funding Social Security. This proposal raises some questions proponents are willing to face, and at least one biggie they have heretofore preferred to ignore, specifically, the question of intergenerational equity.
In stark contrast to those coming up with solutions, judging from the current administration as well as the two candidates running to replace it, one might conclude there’s no problem at all. After all, how could such an enormous fiscal disaster be so certain and yet the President and those who seek to be President remain so silent? How indeed?
Others have given the fiscal threats to Social Security, Medicare, and Medicaid serious consideration and have put forward their ideas worthy of consideration. For example, earlier this year the bipartisan Commission on Retirement Security developed a plan to secure Social Security’s future as part of a comprehensive effort to strengthen retirement security. A few years ago the Simpson-Bowles Commission came up with a plan to address the nation’s long-term fiscal health. In an extraordinarily successful effort, in 2011 the Peter G. Petersen Foundation launched the Solutions Initiative in which it commissioned six think tanks from across the political spectrum to come up with their own very detailed plans for dealing with the nation’s unsustainable entitlements. All six offered a credible plan.
Plenty of good ideas are circulating for addressing all three of the major entitlement programs. What has been lacking is not workable solutions, but, with a very few exceptions, politicians willing to work toward solutions.
Slower growth in the economy would also slow the growth in federal tax receipts from individual income tax and every other source. Thus, while improving Social Security’s fiscal picture, a higher payroll tax rate would exacerbate the extreme financing stress already operating in the rest of the federal budget. Slower economic growth would also mean these downward pressures on receipts would befall State and local governments, exacerbating their fiscal troubles. Analysts will come up with all manner of estimates for these effects, but what we know for sure is the direction – downward. Social Security is funded primarily by payroll tax. The program has a massive future funding shortfall. One obvious solution to consider is to raise the tax, either by expanding its coverage to include fringe benefits, by raising the tax rate, or by lifting the cap on the amount of taxable income. One common point of opposition to raising the payroll tax is that raising taxes on workers would inevitably lead to a reduction in the growth of the labor supply, thus reducing the economy’s long-run output. The labor supply is already projected to grow much more slowly than in the past due to the retirement of the baby boom generation. A higher payroll tax in any form would slow labor force growth further.
These points have long been part of the debate, and will continue to be so. What has been largely missing, however, is a discussion of intergenerational equity. Distilled to its essence, the issue is fairly simple. Social Security is in financial difficulty because past, current, and near future beneficiaries were promised benefits exceeding what their payroll taxes could cover. To be sure, the government, that is past Congresses and Presidents promised the benefits on which current and future beneficiaries rely. But policymakers failed to set tax rates sufficient to cover the tab, hence the funding shortfall.
Proposing to raise payroll tax rates on current and future workers is asking them to cover the cost of benefits for those who didn’t pay the cost. This hardly seems fair. To be sure, the nation needs to ensure the economic security of low-income seniors, but this speaks to the social safety net portion of Social Security, not to the program as a general purpose federally run pension scheme.
Why should young people struggling to pay their own bills and to save for their own retirement pay more tax so non-low-income seniors in retirement who underpaid receive their full benefits? Proponents of a higher payroll tax rate often resort to references to fairness to justify their proposals. In the light of the intergenerational aspects, raising the payroll tax seems distinctly unfair. This question of fairness to today’s younger workers is one proponents must answer if they expect their ideas to gain traction.
Dr. J.D. Foster is vice president, Economic Policy Division, and chief economist at the U.S. Chamber of Commerce.